Elvira Nabiullina’s remarks at Federation Council’s Financial Market Development Board meeting
Good afternoon, Madam Speaker and colleagues.
Thank you for your invitation to speak at this meeting. In my remarks, I want to focus on the issues that the Speaker has raised as well as on some others.
We are engaged in an ongoing, substantive and very professional dialogue with the Federation Council — and I mean every word of this. Madam Speaker, Mr Zhuravlev, Mr Yatskin, Mr Artamonov, Mr Ulbashev and other senators, you have all made a tremendous contribution to the initiatives that carry important implications for people and businesses, the development of financial infrastructure and the launch of new instruments for cross-border payments.
Let me begin with monetary policy issues. Keeping inflation in check is the best contribution of the Central Bank to sustainable economic growth and protection of real household incomes. This is much more than an agenda item, this is our mission, if you like.
I anticipate the objections: you have been talking about this for many years, but things are not moving. However, let me remind you that we once succeeded in lowering inflation to 4% and keeping it at target from 2017 to 2020. At the time, we enjoyed a rapid expansion in long-term lending, including mortgages, without extensive subsidised programmes. As they were convinced that sustainably low inflation was possible in Russia, banks cut rates. People were less concerned about prices than now.
Those were indeed fairly quiet years, and the conventional method of curbing inflation that many countries apply worked very well in Russia. Will it work now? Let me put it this way: our ship is in stormy and uncharted waters, but the ocean is still the ocean. With the steering wheel firmly in our hands, we need to navigate our way towards the goal. It is true to say that while in quiet times it takes one or one and a half years to tame inflation, more time will be needed now. But we will definitely deliver on the goal.
Let me detail the rationale for our decisions.
You may remember that we have seen a significant acceleration in inflation since last year. In August, we implemented a drastic rise in the key rate, taking it to as high 16% in December. We thought that was sufficient to enable a steady deceleration in inflation. While the first-quarter data bore this out, the trend reversed in the second quarter, when inflation stopped declining and even resumed growth. Why did it?
Why were companies still raising loans at an accelerated pace despite markedly rising rates? As a reminder, corporate lending is growing apace at 21% year-on-year. In the first half, banks issued loans worth 5.6 trillion rubles. It would seem against the logic that corporate demand for loans persists despite such high rates. Yet in current conditions, companies’ behaviour is not irrational.
First, floating-rate loans accounted for 99% of growth in corporate lending, in a sign that companies hoped for a soon decline in the rates. They were guided by their past experience, and so were we. Previously, in 2015 and 2022, a sharp increase in the key rate gave way to a speedy decline. However, this time it is different. The rate rise is not to counter the sanctions and the ensuing financial shocks, but to head off spiralling inflation triggered by an excessive expansion in demand that is meant to boost supply. Incidentally, floating rates bring high risks for companies, so let me take this opportunity to urge businesses to ensure interest rate risk is managed better.
Second, many businesses show record profits and a good outlook given unoccupied domestic market segments. They are ready to take out and service costly loans.
What also matters is fiscal stimulus. The impact of government support is direct and indirect alike. For example, companies with major long-term government contracts are tolerant of overly expensive loans.
Certainly, subsidised lending, especially subsidised mortgage lending, was of some consequence.
In defiance of conventional thinking, people are not only increasingly opening deposits — which is only natural with high interest rates — but are also taking out loans for big-ticket purchases. Incomes are up in a considerable part of households, not all but in a large group, which drives up consumer confidence.
All this suggests that we need higher interest rates today to cool down excessive, proinflationary, demand and return inflation to target. This is why we have raised the key rate to 18%.
A common question is why reduce inflation at this great cost? Perhaps we could do with inflation at
This suggestion is a dangerous illusion. High inflation is a sign of problems, just like fever heat is a sign of human illness.
In the case of our economy, this is the problem: there is no shortage of money even with so high interest rates; lending is on the rise and corporate profits are at multi-year highs. As a reminder, over the first five months of the year, corporate profits total ₽13 trillion (almost 14% up from the same period last year), suggesting that there are financial resources for investment. However, the economy is not always ready to meet rising demand due to the lack of physical resources. There are almost no untapped labour force and production capacities. I think that many of you can refer to current developments in your regions to confirm how difficult it is now to retain staff, to say nothing of hiring.
What happens if demand is spurred while resources are insufficient? All such demand translates into accelerating inflation, sparking a slowdown in the economy. More so, there is a risk of the economy tipping into a deep recession. When inflation is high and accelerating, the economy is very vulnerable and fails to readily answer the helm — just like a ship. This should not be tolerated in our conditions.
I must also bring up the subject of households in the context of their growing incomes, which I have mentioned, and which is a good thing. But let us not forget that incomes of low earners are falling behind inflation. For them, our policy of inflation reduction is much more than an abstract idea but a question of whether they can feed their families and climb out of poverty.
As we go along, we cannot escape a period of high rates. Everyone’s concern is how the economy will feel in that period and if it can keep momentum. This mainly depends on whether we can relieve the shortage of resources I have flagged. We are not in a unique situation. Many countries have successfully navigated it thanks to new technology, improved labour management and thus increased labour productivity. Russia is also on this path. As we move along, we will need significant investment, and it has grown considerably in recent years. Our policy will aim to encourage investment — for it is sustainably low inflation and growing savings that can enable affordable financing.
In recent years, banks have been actively involved in economic development. Banks are healthy, sustainable, and have capital. However, there is a limit to the risks that banks can assume when funding a project, for the reason that there are depositors behind each bank. In this context, I will zero in on the several topics that the Speaker has touched upon.
First, on companies raising increasingly more funds at the exchange. Incentives for issuers are essential here, and there are discussions under way about them with the Ministry of Economic Development and the Ministry of Finance. The second aspect to this is investor demand.
As the oversubscription for the latest offerings shows, demand is in place. Although we have so far seen only small companies entering the exchange, demand is set to expand gradually including through the launch of individual investment accounts of the third type, of the Long-Term Savings Programme and Unit-linked Life Insurance Programme, from next year.
It is imperative that both issuers and the placement procedure are transparent and clear to investors. People who invest their money in businesses, shares in companies, have every right to understand the real prospects of these companies. This can only be achieved through information disclosure. We realise that disclosure is related to sanction risks, but the information investors need must be disclosed. There should be transparent and consistent dividend policies as well as a dividend strategy given that people look to returns on their share investments. What also matters is high-quality corporate governance.
Furthermore, protection of minority rights is certainly needed. Private investors are minority shareholders. Understandably, their rights were restricted in 2022, in what was a temporary measure. We can see that companies would like to extend the restrictions. Yet these restrictions essentially violate the rights of shareholders to information and judicial protection, discouraging share investment. In our view, whatever restrictions remain should only be limited to shareholders from unfriendly states.
The second aspect to investment financing is adjusting government support instruments and their alignment. The scale of subsidies and benefits for industry, high-tech companies, is indeed considerable. In my opinion, these issues need an indepth analysis to determine our top priorities. The more of subsidised loans we have, the higher the interest rate is for companies without access to preferential programmes. Our ultimate objective is to enable affordable financing through massive corporate lending based on truly market conditions. This is why we should make a top priority list.
Further to the Speaker’s point on the taxonomy of technological sovereignty projects, we believe that these projects should be the special focus of government support since these are the key priorities and such that the Government has designated essential to technological sovereignty. The Bank of Russia’s regulatory benefits that are currently available to banks lending to such projects are clearly not enough. In our view, we need to make sure these combine and work together with the support package the Speaker has mentioned.
Third, we strongly believe that government support goes beyond subsidised loans. Among other potential measures are tax deductions and government guarantees, unconditional and irrevocable. With all my great respect to the Ministry of Finance, this is the issue we have argued over with them for several years. Such government guarantees are currently unavailable from the Ministry of Finance, but our stance is if certain projects are critical to economic development, it is right for the state to share risks with business. Businesses are not often ready to assume these risks without state support. The alternative option would be expanding, as much as possible, the guarantees that are issued by VEB, our development institute. These policies would not involve a drastic increase in public spending, but they could lend significant support to projects that are integral to the economy.
In this context, look no further than the non-targeted subsidised mortgage programme to see what happens when loans are subsidised across the board. Can mortgages be affordable again without driving up home prices? They can, and this is where I would like to revisit our period of low inflation. You may well remember that mortgage rates were declining then and inflation was low. Before the pandemic, banks extended loans at
This will propel household incomes to grow at a faster pace than housing prices, as before, which exactly means more affordable housing. We should retain only strictly targeted subsidised programmes which are integral to our objectives, economic and social.
Another important point to make, we intend to combat all kinds of schemes in mortgage lending. These schemes have seen a resurgence in the run-up to the withdrawal of broad preferential programmes. They come in all sorts and include instalment plans, so-called cashback and offers of very low rates. However, all the ‘benefits’ for people are tantamount to an exorbitant apartment price or a sharp increase in subsequent payments. These schemes are all opaque and confusing for people.
We have recently agreed on a mortgage standard with banks, one that rules out any risky schemes. It is to be applied from early next year, and as regards its ban on a charge for a reduced rate, from next July.
Let me stress that lending does not stop even with the key rate of 18%, so loans including mortgages will continue to grow, but at a more balanced pace.
Let me now focus on the issue of great concern to businesses and us: cross-border settlements. The rising risks of secondary sanctions hold back payments for imports — imports of a very broad range at that. As a rule, businesses find a way out, but supply chains are becoming more complicated, timeframes longer, and costs higher. Settlements are exposed to sanctions as long as they are made in dollars or euros and through SWIFT. The strategic approach is a switch to settlements in national currencies through independent financial messaging channels.
In this area, we are also working with our BRICS partners. In particular, we have joined efforts with the Ministry of Finance to advance BRICS Bridge, with the goal of reducing the cost and timelines of national currency settlements across BRICS, including new member countries.
We are ready to be flexible with our external payments. Today, the Duma is considering a law to allow settlements in cryptocurrencies under an experimental regime. The details of this experiment are being discussed with ministries, departments and the business community, so we expect to pioneer such payments before the end of this year.
Concurrently, discussions are under way about a law that would simplify the use of digital financial assets for cross-border settlements.
Cross-border settlements through central bank digital currencies are a potential option moving forward. We are in dialogue about this with a number of countries.
Now on to our digital ruble pilot. It is going to be expanded in just one month for the participating banks. We plan to make a number of further extensions. At this point, I can say that if everything goes to plan, the pilot will transform into a mass-scale rollout of a digital ruble from July 2025. These are target dates. However, this will be a gradual process.
Let me stress once again that the use of a digital ruble by individuals will be absolutely voluntary. I will say this again and again to clear up the common misunderstanding that we are supposedly planning to impose a digital ruble. That is not true. In our opinion, a digital ruble offers clear advantages to its users: absolutely free transfers for individuals and transfers with much lower fees for businesses than cards. We believe that these advantages will gradually make a digital ruble part of our life over the course of five to seven years.
I feel I must speak on the subject of fraud that the Speaker has highlighted. To turn the tide here, we will rely on the exchange of data on droppers through which stolen money is withdrawn. This is the weakest link for scammers.
We have a database that is updated with information from banks and the Ministry of Internal Affairs. Under a law that came into force last week, banks are obliged — rather than have the right — to disconnect droppers from remote service if they receive information about them from the Ministry of Internal Affairs as part of a criminal investigation. Droppers are rid of the most important thing — the ability to withdraw money, with each and every bank being connected to our database. This means that fraudsters will struggle to cast a broad net, resulting in a lower scale of attacks as their costs rise. Still, we will watch the situation closely and come up with additional measures if needed.
However, it is not enough to make transfers absolutely safe. We also need to fight credit fraud. There are two problems here. The first is social engineering as such, when a person is encouraged to take out a loan and transfer the money to fraudsters. Such cases are common and amount to millions of rubles. The second problem relates to fraudsters issuing a microloan in a person’s name without their knowledge.
We have put our proposals into a draft law to counter such credit fraud, and we will ask you to support it.
What do we propose? We can see that banks are now able to disburse loans almost instantly. Although it is convenient for borrowers obtaining loans in no time, the blind approach is not at all an option. If a bank suspects that a borrower has been brainwashed by fraudsters, a cooling-off period is needed to help the borrower figure it all out. It can last two days for a sizeable loan of ₽200 thousand and over. The same cooling-off period was put in place last week for suspicious transfers. For smaller loans, a minimum delay of few hours is also needed before a transfer — in case the money is being transferred to fraudsters. We are ready to discuss both the timing and cut-off amounts, but our argument here is that every hour we can win from fraudsters is of the essence.
In microfinance, we are considering options for enhancing borrower identification. These arrangements are meant to prevent a loan being issued to a borrower without their knowledge of the relevant liabilities, to close the door on a microloan being made on receipt of a passport copy alone. An enhanced identification system should be in place.
Certainly, we expect the self-restrictions law as regards loans, in force from next year, to make a difference. We have discussed it for a long time.
Given the limited time for my remarks and the number of questions, I may have been unable to cover all of them. To conclude, I would like to thank once again the Federation Council. We are working very closely with you in all areas that include preventing debt overloads, protecting consumer rights and advancing our payment systems. Two more areas are instalment plans, following up on your remark on the importance of adjusting instalment plans and, indeed, loans. While on the subject of overhauling the loan subsidy framework, my position is, this is the right thing to do. Currently, it is very inefficient in setting a fixed rate on a loan regardless of key rate movements. This simply means that we increase or decrease the subsidy. I think that the Ministry of Finance will not be against fixed subsidies, in line with your proposal. As far as we are concerned, the proposal is quite reasonable and we are ready to support it. We are ready to work through all the initiatives and on all the issues that have been raised by the Speaker today and that participants will likely touch upon.
We value your readiness for constructive dialogue. Thank you very much for your support with the complex initiatives that need discussion. They are all aimed to protect the interests of our people and businesses. We understand that your position is based on your close connections with your regions and that you have a good sense of the problems. We appreciate this. Thank you very much for your attention and for organising today’s discussion.